Levels of Financial Freedom

“Financial independence” in some ways is defined as when your passive income (i.e. income you receive outside of your day job) exceeds your expenses. But before you reach that point, there are other levels of financial freedom along the way.

The first level of financial freedom is when your income exceeds your expenses. You reach subsequent levels of financial freedom the wider the gap is between your income and your expenses.

For me, my most recent raise increased my internal level of financial freedom significantly. I was already comfortable with my monthly cash flow, but that last raise made me completely comfortable with my monthly cash flow. I now have about $2,000 in extra money per month after maxing out my 401(k) and taxes and my bonuses almost doubled from last year.

So long as I get a reasonable amount of enjoyment out of my job, this level of financial freedom is pretty sweet.

The next big level of financial freedom is when passive income meets expenses. That is quite a few more years away, but slowly over the next decade, my passive income will build up and I’m really enjoying watching it.

The third level of financial freedom, which I don’t want to ever reach, is when passive income / safe withdrawal of principal exceeds expenses by such a wide margin that one really never has to do any form of work ever again and could buy way fancier cars than I want.

Me? I love my job and my coworkers. Writing and designing code, mentoring junior engineers is fun. It’s a bonus that it comes with such a high income. I don’t need to spend it all and my expenses have stayed somewhat stable, so I’ve been banking more money each year. (This year, assuming I keep my job through the end of the year, I will gross almost $100,000 more than my expenses.) Eventually, my passive income could meet my expenses, but seeing as that’s a decade out, what I need to in the meantime is enjoy my life, not worry about money so much, and keep saving and enjoying my job.

P.S. I’m finally able to guess when guys are asking me out. This definitely results in more dates.

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22 thoughts on “Levels of Financial Freedom

  1. Your PS made me laugh. Dating is challenging. Mr. NTF and I got set up- which took at least some of the guess work out of everything.

    I am so motivated to keep our expenses way below our income. This level of financial independence is such a stress relief. I keep the other levels of FI in mind but it will take awhile to get there- especially now that we have kids and we want to be able to pay for college!

    • Agreed! I am very good at stressing about things I don’t need to, so this level of financial freedom is really, really good for my sanity.

      I haven’t had many setups yet. Usually if it’s a friend of a friend, they dragged me to some party where the person was there and got us talking on our own, which I think is better than blind dates.

  2. If, for some period of time, expenses have exceeded income, that usually implies (though it doesn’t guarantee) that a person has acquired debt. In which case I’d add an intermediary “debt freedom” step of financial freedom.

    When I’d achieved a certain level of savings (I always had pretty rationalized spending) and realized I could leave my job and just chill out for quite a few years I felt like I’d achieved a level of financial freedom, though it was by no means ‘passive income’ freedom.

    It’s good to like your job. I think a lot of people use spending is an opiate because they don’t like their jobs. I enjoy my job. I enjoy staying home for 10 months to spend time with my daughter even more (speaking of financial freedom!)

    Meeting people is odd. My partner and I met at university. I was yelling at her with a horn.

    • Rofl, awesome way to meet her! I’m pretty convinced at this point that every story of how you met someone can be spun into a good one.

      A good portion of my “savings” are in tax-advantaged accounts right now, so I couldn’t necessarily just quit and chill out for a few years, but I do have several years of expenses saved up.

  3. I wouldn’t mind that third level… even if one wants to continue working etc, there’s plenty of stuff to do with extra money besides buy fancy cars, particularly if one is charitably minded.

    We’ve got friends who made it big in Silicon Valley during the dot com boom who hit that third level. It can happen (almost seemingly randomly for people who work in tech, and many of them don’t quit because of it)!

    • I think that a lot of people in tech are strange in that they would do their jobs for free, so the high income is really just a strange bonus that they bank because they also have a lower tendency to spend like crazy.

      My first goal for financial independence was related to the fact that I saw very few people at my level who are over 50, making me think that it’s either up or out at a certain point and that finding a new job after 50 would be difficult, so I should make sure I was ready to retire by 50 if I didn’t want to go up.

      I’m not sure I have the risk level to go do a start-up or start a company myself, but maybe I’ll change my mind on that when I reach the next level of financial freedom by 35? Or I guess if I get laid off, that could be what I do next. So many companies fail that it has to be pretty random to end up at one that does succeed.

        • All of my bonuses are paid out in stock now, though I don’t keep any of the shares because there is so much of it and I don’t want to be that undiversified. (It was over $30k this year.)

          The grant stock price on some of them was super low, which is quite nice :) That is partially why my income is growing faster than I expect.

    • Oooooh, re-reading this, I think I’ve come up with an idea of what to do with extra money if I end up in one of those dot com booms quickly! I’ll start a scholarship fund for women interested in STEM fields to help make it more affordable.

    • Almost! Thanks! According to my calculations, it’s about ten years out still, but I would still say that early thirties with an almost $300,000 mortgage paid off and living off of the income from my stocks and savings accounts would be pretty sweet.

  4. Ahhh you are sooo lucky Leigh! I can’t wait to be at your level. I’d be happy at your level and not the 3rd level, seriously. I don’t know if I’ll be able to do it though since I want to have a family soon and I’ll have a lot of debt from school loans. Hopefully one day I’ll have discretionary that is more than a few months’ of expenses after maxing out retirement funds and other savings vehicles.

    I met my BF of 7 years in college…at a rush party no less. It was fun and we danced =)

    • Thanks, Erika! Wow, 7 years – that’s amazing :)

      I think that striving to be at my level (income above expenses) is a pretty good starting goal that you should be able to accomplish after you’re done school! Especially if you’re planning on having kids not too long after you’re done school since that will probably drive your costs up even more.

  5. Nice, looks like you’re doing well! I think I’m shooting for my passive income to meet my expenses. That way I can get a job doing what I really want and money won’t matter as much. Although I do like my day job for now :)

    • I really like my job, though I do worry that the cutthroat nature of the industry will get to me eventually, so by saving tons of money now, I have the option to retire in my early thirties if I so _choose_.

      • Losing the risk of losing your job might help you do even better :) So many people seem to get caught up in sticking as close as possible to the safe road and miss out on opportunities for big improvements (which sometimes come at the cost of saying unpopular things and sticking it out for a while until people realize you’re right).

        • I was going to say financial freedom, but if you’re still working then you’re either getting something from it or doing someone a favor so chances are you have something to lose :) Fortunately if you can code there is always something interesting in desperate need of help.

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